“Best Interest” Provision Under Review; Fiduciary Rule in Question

“New Fiduciary Rule for Financial Advisers Puts Retirees First, Labor Secretary Says.” Source: Bloomberg April 6, 2016.

Atlanta, GA–Feb. 4, 2017
By: Jeffrey Albertson,

Yesterday, President Donald Trump signed a presidential memorandum on the Fiduciary Duty Rule, directing the Department of Labor to delay implementation for 180 days to “ examine” and “determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” The memorandum requires an impact-analysis seeking to predict future costs and increases in litigation, increases in the prices that investors and retirees must pay to gain access to retirement services, and publish for notice and comment a proposed rule rescinding or revising the rule.

The Fiduciary Rule requires that brokers giving retirement advice and selling investments must comply with the “best interest fiduciary standard,” which requires putting a client’s interests above their own. The best-interest standard would end the common industry practice of steering clients into high-priced strategies and products, even when comparable lower-cost options are available.

According to the then Obama Administration’s “White House Council of Economic Advisers, Americans lose an estimated $17 billion in retirement savings each year because of misleading advice.” Specifically, the law curbs the billion of dollars paid in fees annually by small savers who transfer money out of 401(k)s into individual retirement accounts (IRA). Managers of 401(k)s currently have a best-interest requirement, while those for IRAs are only required to give “suitable recommendations.” Critics of the “suitable recommendation” contend this encourages advisers to charge excessive fees or favor investments that offer hidden commissions.

With IRAs, savers may be working with financial-product sales people who earn more selling certain products and do not have to put their clients’ interests before their own.

According to analysis from Investor’s Business Daily:

  • Mutual fund front-end loads—commission paid when the fund is bought—range from 0.50% to 5.75% of the value of that shares purchased. Deferred loads—paid when shares are sold—range from 1% to 4%.
  • The average annual expense ratio, or percent of assets paid by the shareholder to the fund manager, is 1.18%. Stock funds bear an average annual cost of 1.25%. Bond-fund shareholders 0.96% on average.
  • At 1.18%, $2.2 trillion in at-risk IRA assets would generage $39.6 billion in annual fees alone.

The proposed ruling, issued by administrative rule making from the Department of Labor, battled through both a gauntlet of Federal court challenges in Washington, D.C., Kansas, and Texas, but ultimately the legality was upheld. The final decision on the litigation filed in Dallas, TX is expected by February 10.

Republicans argued that the regulation would make retirement investment advice more expensive, while Democrats say it’s essential to protect consumers and prevent conflicts of interest. In May 2016, Congress passed a joint-resolution calling for nullification of the law, but the measure was later vetoed by President Barack Obama in June. The House sought to override Mr. Obama’s veto, but their vote of 239-180 failed to meet the two-thirds majority requirement.

Following the Presidential election, advisors on the Trump team indicated the need “to get rid of this.” According to then transition official Anthony Scaramucci, The Trump Administration would “instead imposed a “self-auditing process” for registered financial advisers…leading “to better client safety, less governmental opposition.” It was reported in the New York Times earlier this week Mr. Scaramucci would not be taking a senior job at the White House because of the sale of his $180 million-valued firm, SkyBridge Capital, to a politically connected Chinese conglomerate. The sale is expected to take three months and during such period, conflicts of interest may arise.

The Department of Labor published the proposed rule on April 20, 2015 with an eight month implementation, but after significant outcry from the financial services industry, the complete roll-out was delayed until January 2018. Also, the notice and comment period was extended, during which the Department of Labor review major concerns from the industry. The “best interest” standard is scheduled to go into effect April 10, 2017, but the memorandum now jeopardizes that.

The lingering issue is how the financial services industry will react considering the requirement goes into effect in just over two months and companies have begun, if not completed compliance training.

I invite you join me on Twitter (@_JAlbertson) to follow regular updates.

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